The Physical Gold Market Will Prevail Over the Paper Market

Investors have to put aside the short-term action in gold and silver and look at the fundamentals. It’s hard to know where to start. There are fires burning everywhere in the world, and these fires can’t be extinguished.

Therefore, all governments and central banks will do is put more fuel on the fires because they don’t have any other tools to rectify these massive problems that we have in the world...

Any of these fires could be the catalyst for the next major crisis, and the next crisis in the world will be much more severe than in 2008. I’ve previously stated that Japan is a basket case that can never be saved. And of course Japan is the world’s 3rd biggest economy.

When you look at China, its financial system and economy is a bubble. The bursting of this bubble will likely have a massive effect on the world economy and global trade. Therefore, both Japan and China will continue to expand credit and print money. That’s the only thing they can do to save their economies. Of course the consequences will be inflationary, and most likely hyperinflationary.

If you look at Europe, we just had two central banks confirming that their economies are in real trouble. The ECB just had a press conference where Draghi stated that rates will stay low for an extended period. The ECB is under tremendous pressure. It’s balance sheet is full of toxic debt from its member countries.

These debts are guaranteed by the member countries, and some also by member country banks, and these debts are held on the ECB balance sheet at par. These assets are not worth par. Some of it is worth less than 50% of par. So you have a potential write off for the ECB of hundreds of billions of dollars, or maybe even one trillion dollars. And even though the member countries and some banks are guaranteeing the money, they don’t have the money to pay the ECB. So the ECB will be forced to print a lot more money.

This is why the ECB is keeping rates low. High rates would be a disaster for the ECB and member countries. The problem is that rates cannot be kept low forever. Just look at the examples of Spain, Italy, Greece and Portugal. The 10-Year rate in Portugal has now risen to 7.6%. This is what will happen everywhere.

If you look at the UK, the Governor of the Bank of England is an ex-Goldman Sachs man, Mark Carney. He also confirmed that rates will stay low at least until 2014. The UK economy is under tremendous pressure. You can’t have low rates, massive borrowing and money printing. Rates will surge eventually and central banks will lose control.

Don’t for one second think the Fed can stay outside of this. They have lent over $1 trillion to European banks. They won’t get that money back. You have to remember that the whole financial system is interconnected. This is why the Fed can never stop printing.

So central banks in Europe are continuing to print money and this is simply a continuation of the currency wars. But we must not believe for one second that the US will not react. The US will respond by simply printing more money to lower the value of the dollar.

We are seeing the trade deficit in the US increasing. It was $45 billion in May. This will soon have an effect on the dollar and US GDP, and it will be to the downside of course. ISM Manufacturing is the lowest since 2010. Non-Farm Payrolls came out today at a 195,00 gain. I don’t believe these figures because they are always seasonally adjusted and manipulated every month.

But even with those figures, 77,000 additions were in low paying jobs. If you look at the household survey, there was actually an addition of 360,000 part-time jobs, and a decline of 240,000 full-time jobs. Full-time jobs are declining and that is not the sign of a strong economy.

Looking at gold and silver, physical demand is still very high. Silver coin sales in the United States are up 56%. If we look at Swiss refiners, some still have delays of four weeks. So we are seeing four week delays and yet gold is still under paper selling pressure.

But we are seeing gold and silver forging a bottom here, and we will see a very strong market in the autumn. The paper market is still the dominant market right now, and it’s ignoring what is happening in the real (physical) market. We know that can’t continue for long.

We know the physical market will prevail, and the shorts will be forced to cover. So investors should simply ignore the paper smash and continue to accumulate physical gold and silver because in the end the physical market will prevail.

Founder and Managing Partner of Matterhorn Asset Management AG (MAM) and GoldSwitzerland, Egon Von Greyerz joined the board of Goldbroker.com in 2012.
Egon von Greyerz started his working life in Geneva as a banker and thereafter spent 17 years as Finance Director and Executive Vice-Chairman of Dixons Group Plc.
Since the 1990s EvG has been actively involved with financial investment activities including Mergers and Acquisitions and Asset allocation consultancy for private family funds. This led to the creation of MAM in 1998, an asset management company based on wealth preservation principles.
EvG makes regular media appearances (CNBC, BBC...) and speaks at investment conferences around the world.
EvG forecasted the current present problems in the world economy well over 10 years ago. In 2002 when gold was $300 per ounce, MAM recommended to its investors to put 50% of their investment assets into physical gold stored outside the banking system.